Chairman Charlie Ergen still has some strong cards to play in the media game.
Photo: Andrew Kelly/Landov

While Dish has 14 million TV subscribers, its value is now basically tied to spectrum, or wireless real estate, that it has acquired since 2008. The spectrum remains undeveloped, but it could ultimately be used for Dish's own wireless network or, more likely, to bolster someone else's. Bullish analysts think the spectrum alone could be worth $25 billion, after taxes, if sold. With a stock-market value of just $30 billion, investors are giving Dish short shrift for its satellite-TV business, which is highly profitable, even if slow-growing. As investors get a better handle on the spectrum's worth, Dish shares could rise 20%. The stock has shown surprising resilience since the company was left out of the merger parade. It closed the week at $66.37, a 52-week high.

THE NEXT LEG UP could come in November, when the Federal Communications Commission holds its largest spectrum auction since 2008. "Just from a stock perspective, you don't have to have a view on what Dish is ultimately going to do with the spectrum," says Jason Bazinet, who covers the media, cable, and satellite sector for Citigroup. "The thesis is that the auction itself will be a positive catalyst for the stock. You just have to look forward to November." Bazinet recently upgraded Dish to Buy with a price target of $79.

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The FCC has already set a minimum price of $10.1 billion for the spectrum, which is expected to attract significant interest from wireless operators. But unlike Dish's holdings, which are nationwide, this spectrum is carved into regional pieces. There's no guarantee a buyer will get the whole pie. The spectrum being auctioned is also less conducive to high-speed data transmission than what Dish already owns.

As always, the Dish story is focused on Charlie Ergen, its founder, chairman, and majority shareholder. Long considered a maverick in the industry, Ergen has been more willing than any other pay-TV provider to shake up the status quo. He's amassed this huge swath of wireless spectrum, while helping his TV customers erase commercials and stream channels outside their home.

"He's a risk taker," says Marci Ryvicker, who covers Dish and the TV universe for Wells Fargo. "Either you believe that he is rational and brilliant or you believe he's irrational and stubborn." Ryvicker, who is in the former camp, has an Outperform rating on the stock. She says Ergen is better aligned with shareholders than any other executive she covers. His 51% stake in the company is worth some $15 billion.

A FORMER PROFESSIONAL GAMBLER, Ergen has often been a step ahead of everyone else. "On almost every negotiation, he's come out in significantly better position than anyone thought" he would, Ryvicker says.

Some think he may have finally overplayed his hand in merger talks with DirecTV. A filing with the Securities and Exchange Commission notes that he spoke with the company before it moved on to AT&T. His rivals are all now focused on amassing as much scale as possible. Together, Comcast and Time Warner Cable could save significant money on programming. And they'll control over a third of the broadband pipes into American homes. DirecTV, meanwhile, fortifies AT&T's TV business, known as U-verse, and, again, gives the combined companies more leverage in negotiating for content.

But there's likely to be value in being the nimble odd man out, especially as the media industry tries to evolve around disruptive forces, such as mobile video. As a more traditional TV distributor, DirecTV was unlikely to give significant value to Dish's spectrum. That was surely a sticking point in their merger negotiations.

No one knows what Ergen's next move will be. Dish executives declined to speak with Barron's. But it's clear that the spectrum will be front and center, possibly powering some sort of hybrid TV/wireless business.

In a recent note to clients, JPMorgan Chase analyst Philip Cusick points out that a wireless Dish network, using only a portion of its current spectrum, could support 20 million customers downloading 50 gigabytes per month. That usage is on par with the average home broadband user and 29 times greater than Verizon Wireless' average user.

In May, Ergen said: "If I think there's one place that analysts get it wrong and the marketplace gets it wrong, it's probably in valuing our spectrum. The good news…is that it's going to be valued for you, in the sense that there's another auction coming up."

OVER THE PAST 20 years of federal auctions, spectrum has sold for an average of $1 per megahertz-pop, according to Bazinet, the Citi analyst, who has closely studied spectrum transactions and carriers' capacity needs. Megahertz is a measurement of spectrum. The pop, or population, stands for how many people are covered by a spectrum license.

Dish now owns 56 megahertz of spectrum, all nationwide, meaning it covers 318 million people. At historical valuations, Dish's spectrum would be worth $17.8 billion, or 56 megahertz times 318 million people times $1. Dish, for what it's worth, paid $5 billion for the spectrum.

The Bottom Line

As investors come to appreciate the value of Dish's spectrum, the stock could rise to $79 from a recent $66.

Bazinet argues that even the $17.8 billion badly undervalues Dish's spectrum. He points out that Dish's holdings are of better quality than the wireless carriers. Dish has "virgin" spectrum that can be crafted to handle today's one-way data-heavy transmissions. The carriers, though, are stuck with legacy networks meant to handle two-way phone conversations; like a divided highway, their spectrum is split between uplink and downlink traffic.

Mobile video has turned the formula on its head. In today's world, 90% of mobile traffic runs downstream. The carriers are basically left with an unused lane of spectrum that can't easily be converted.

Bazinet values Dish's spectrum at $2.19 per megahertz-pop. It's not a crazy number. By stripping out the value of their operating business, Citi estimates that Verizon's spectrum is valued at $3.52 per megahertz-pop, with AT&T at $2.72.

Ergen hasn't publicly commented since the latest round of deals were announced, but he was in a contemplative mood in May, as rumors swirled that Dish was being left behind.

On a quarterly conference call with investors, the Dish chairman said: "When I used to play poker, and everybody was throwing chips and betting crazy on the table, and I had really good cards, I always felt it was better just to sit back and watch them go at it. And every time they went at it, I'd learn something. As I sat back, they didn't learn anything about what I had. And I learned to trust my cards."